Summary of Jobs and Growth Tax Relief Reconciliation Act of 2003
On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003. The provisions are generally designed for economic stimulus and growth by putting more money into the pockets of individuals and by incenting businesses to increase investment. The total cut is projected to be over $330 billion in tax relief. In order to keep the projected cost down, many of the benefits are temporary and terminate after several years. Of course, a future Congress may be under pressure to extend the benefits. This update highlights the most important changes.
Tax Relief For Individuals
Lower Marginal Tax Rates
Marginal rate reductions that were scheduled to go into effect through 2006 were accelerated to 2003. The top rate also dropped from 38.6% to 35%. The new rates are retroactive to January 1, 2003.
For 2003-2008, the tax rate on qualified stock dividends is 15% for most taxpayers. The new rates are retroactive to January 1, 2003. Pre-2003 Act rates return in 2009. Qualified stock dividends are generally dividends received from a domestic corporation. Corporate stock dividends passed through to investors by a mutual fund, other regulated investment company, partnership, real estate investment trust or held by a common trust fund are also eligible for the reduced rate.
For transactions occurring after May 5, 2003, the capital gains maximum rate is lowered from 20% to 15%. Pre-2003 Act rates return in 2009.
The more favorable stock dividend and capital gain rates also apply to alternative minimum taxable income. For 2003 and 2004 only, the AMT exemption is raised to $58,000 for married filing jointly taxpayers and to $40,250 for single filers. The AMT relief is designed to balance out the regular tax benefits that would otherwise subject many more filers to alternative minimum tax.
Tax Relief for Businesses
Increase of §179 Expensing Election The expensing election allows small businesses to expense a certain amount of the cost of tangible depreciable personal property purchased and placed in service during the tax year in an active trade or business. Under the 2003 Act, the maximum annual expensing amount is now increased to $100,000 from $25,000. The maximum annual expensing amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds a specified dollar level. The phase out level is increased to $400,000 from $200,000. This means that a business can purchase up to $400,000 of new equipment before the $100,000 immediate expense election is limited. These changes are effective for tax years 2003, 2004, and 2005.
Increase and Extension of Bonus First-Year Depreciation
In general, under pre-2003 Act law, a 30% additional first-year depreciation allowance applied to the non-expensed portion of qualified property based on certain limitations. The 2003 Act increased the allowance to 50% bonus first-year depreciation. The provision generally applies to property acquired after May 5, 2003 and before January 1, 2005.
Minnesota has generally updated Minnesota's tax law references to reflect the federal changes with the changes effective at the same time as the federal law. The changes are projected to cause a $100 million loss in state revenue.
The reduced rate on dividends and capital gain will not flow through to Minnesota. Thus, the federal rate reductions have no impact at the state level.
The increased section 179 expensing will flow through and benefit Minnesota filers but taxpayers will only obtain a partial accelerated depreciation with respect to the bonus first year depreciation.